A rally on Friday capped a strong week for markets, as investors became increasingly convinced that the interest rate hiking cycle is over.
Each of the main US indices added over 5% for the week, buoyed by an expected “no change” decision from the Federal Reserve, a lower than expected Treasury borrowing plan and an earnings season which has mostly beaten expectations.
The highly watched non-farm payrolls release provided another boost, with 150,000 jobs having been added in October against estimates of 180,000, and with data from previous months downwardly revised. Alongside the headline number, unemployment ticked slightly higher to 3.9% from 3.8%, while average earnings came in below expectations at 0.2%.
This combination of metrics suggests not only that the labour market could at last be cooling, but also that the rate of decline has yet to demonstrate any proof that a recession is currently on the cards. Indeed, many investors consider that the current glide path is signalling a mild recession at worst, which would fit precisely into the Fed’s ideal outcome.
Further economic data released at the end of the week added to the optimism, as a separate report revealed that growth in service industries was weaker than expected, while also suggesting an easing in prices. Taken together, further relief followed as bond yields tumbled in reaction to the data, thus easing some of the previous pressure on equities.
This week, any number of speeches from Fed officials should reveal the central bank’s current thinking, and whether the latest data has been sufficient to keep the Fed on the sidelines for the moment, especially after a recent GDP print which came in much hotter than expected.
Third-quarter earnings tail off sharply this week, bringing down the curtain on what has been a reassuring season. An estimated 80% of companies have beaten expectations, while outlook comments have tended to mirror the accompanying economic data, with some slowdown in demand likely to spike again ahead of the festive season, and with inflation showing increasing signs of cooling.
In the meantime, the main indices continue their advance in the year to date, with the Dow Jones having added 2.8%, the S&P500 13.5% and the Nasdaq 29%.
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Asian markets followed Wall Street’s lead and pushed ahead on the possibility of peak interest rates, even though the Bank of Japan may yet tighten further, albeit at a very low pace compared to the hikes previously seen elsewhere. Inflation and trade data later in the week from China will also mould sentiment, while on the periphery South Korean shares jumped as authorities reintroduced a ban on short-selling, which will run until the middle of next year.
As has been the case on numerous occasions this year, positive sentiment in the US and Asia was met with a languid response in the UK. Risk sentiment has wavered, a forgettable banking reporting season did little to lift spirits and, for the moment, the likes of the oil majors have lost some steam as the oil price has given up previous gains, currently standing down by 0.3% this year.
Prudential (LSE:PRU) lost some ground after a mixed trading update, while there was some weakness among the retailers ahead of updates from Primark owner Associated British Foods (LSE:ABF) and Marks & Spencer Group (LSE:MKS) this week. JD Sports Fashion (LSE:JD.) proved the exception as a broker initiated coverage with a 'buy' rating.
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The moves mean that the FTSE100 is still in negative territory this year, to the tune of 0.5%, while the FTSE250 remains behind by 4.8% as the UK remains something of an investment pariah, with overseas investors considering there to be better value elsewhere.
While the rate hiking pause is also likely to apply to the UK, the strength of growth as being seen in the US is largely absent, with the economy having its own concerns to deal with in terms of a potential recession.
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